Basic Financial Accounting

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This uncomfortable feeling can be replicated in any industry. Knowing the lingo is an entry-point into the inner circle—an indicator that you truly belong. It's time to roll up those sleeves and build your accounting vocabulary. To help with this, we've compiled an assortment of basic financial terms and acronyms and created a simple accounting glossary for beginners. Check out these basic accounting terms and start to commit them to memory. Accounting ACCG definition: A systematic way of recording and reporting financial transactions for a business or organization.

Accounts payable AP definition: The amount of money a company owes creditors suppliers, etc. Assets fixed and current definition: Current assets CA are those that will be converted to cash within one year. Typically, this could be cash, inventory or accounts receivable. Fixed assets FA are long-term and will likely provide benefits to a company for more than one year, such as a real estate, land or major machinery. Asset class definition: An asset class is a group of securities that behaves similarly in the marketplace. The three main asset classes are equities or stocks, fixed income or bonds, and cash equivalents or money market instruments.

Balance sheet BS definition: A financial report that summarizes a company's assets what it owns , liabilities what it owes and owner or shareholder equity ;at a given time.

Accounting and financial statements

Capital CAP definition: A financial asset or the value of a financial asset, such as cash or goods. Working capital is calculated by taking your current assets subtracted from current liabilities—basically the money or assets an organization can put to work. Cash flow CF definition: The revenue or expense expected to be generated through business activities sales, manufacturing, etc. Certified public accountant CPA definition: A designation given to an accountant who has passed a standardized CPA exam and met government-mandated work experience and educational requirements to become a CPA.

Cost of goods sold COGS definition: The direct expenses related to producing the goods sold by a business. The formula for calculating this will depend on what is being produced, but as an example this may include the cost of the raw materials parts and the amount of employee labor used in production. Credit CR definition: An accounting entry that may either decrease assets or increase liabilities and equity on the company's balance sheet, depending on the transaction. When using the double-entry accounting method there will be two recorded entries for every transaction: A credit and a debit.

Debit DR definition: An accounting entry where there is either an increase in assets or a decrease in liabilities on a company's balance sheet.

Diversification definition: The process of allocating or spreading capital investments into varied assets to avoid over-exposure to risk. Equity and owner's equity OE definition: In the most general sense, equity is assets minus liabilities. The owners of the stock are known as shareholders. Insolvency definition: A state where an individual or organization can no longer meet financial obligations with lender s when their debts come due.

Generally accepted accounting principles GAAP definition: A set of rules and guidelines developed by the accounting industry for companies to follow when reporting financial data. Following these rules is especially critical for all publicly traded companies. General ledger GL definition: A complete record of the financial transactions over the life of a company.

Liabilities current and long-term definition: A company's debts or financial obligations incurred during business operations.

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Current liabilities CL are those debts that are payable within a year, such as a debt to suppliers. Long-term liabilities LTL are typically payable over a period of time greater than one year. An example of a long-term liability would be a multi-year mortgage for office space.

This can shield business owners from losing their entire life savings if, for example, someone were to sue the company. Net income NI definition: A company's total earnings, also called net profit. Net income is calculated by subtracting total expenses from total revenues. Present value PV definition: The current value of a future sum of money based on a specific rate of return.

See an example of the time value of money here.

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Return on investment ROI definition : A measure used to evaluate the financial performance relative to the amount of money that was invested. The ROI is calculated by dividing the net profit by the cost of the investment. The result is often expressed as a percentage. See an example here. Roth IRAs are not tax-deductible; however, eligible distributions are tax-free, so as the money grows, it is not subject to taxes upon with-drawls.

The deferred money is usually not subject to tax until it is withdrawn; however, an employee with a Roth K can make contributions after taxes. Additionally, some employers chose to match the contributions made by their employees up to a certain percentage. An investor, whether an individual, company, municipality or government, loans money to an entity with the promise of receiving their money back plus interest.

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By requesting information, I authorize Rasmussen College to contact me by email, phone or text message at the number provided. There is no obligation to enroll. Among the internal users of financial statements are managers, who can take decisions on the basis of the financial statements, and among the external users are government authorities, who can initiate tax measures.

Assets include cash, stocks, buildings, and machinery, while liabilities include loans, interest, and wages. Read more about balance sheets. It presents the revenues sales and service revenues , expenses operating expenses, such as wages and rent, and non-operating expenses, such as loan interest , gains, and losses.

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Read more on Profilt and Loss. Cash flow statement: The cash statement shows the inflow and outflow of cash and its use for operating, financing, and investing activities. Here are some details on the cash flow statement. At the core of financial accounting is the double-entry accounting method, by which each financial transaction is entered in at least two accounts assets, liabilities, and expenses are examples of accounts —as a debit in one account and as a credit in another account.

Lean More About Types of Financial Reports:

A debit increases some accounts and decreases some others. Similarly, a credit increases some accounts and decreases some others. Imagine that a company takes a bank loan. Under the double-entry system, this transaction has to be entered as a credit in one account and as a debit in another account. Therefore, it is entered as a debit transaction under the assets account. So, it is entered as a credit transaction under the liabilities account. This procedure is followed under the double-entry system of accounting. Information about which accounts to credit or debit for each transaction is available from online resources on accounting.

For example, an increase in expense and a decrease in income are always debit entries, and a decrease in assets and an increase in liabilities are always credit entries. An important aspect to remember is that debiting an account does not always mean decreasing it, nor does crediting an account always mean increasing it. Each credit should be balanced by a debit, and vice versa it is not a question of balancing each increase in an account with a decrease in another account. If a company records its accounts accurately, the left side of the equation will match the right side. Another cornerstone of financial accounting is the accrual accounting system, by which revenues and expenses are recorded in the financial statements when they are earned or incurred, not when the cash comes in or goes out, as is done under the cash accounting system.

The accrual system ensures that the statements reflect the financial position of the company accurately, and that there is no overestimation of revenue or profits.

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  6. Most or all of the general principles of accounting apply to financial accounting, too. In India, financial accounting standards are notified by the Ministry of Corporate Affairs in tune with the guidelines of the International Financial Reporting Standards.